Reviving the Rustbelt

Private enterprises in Northeast China face more challenges than in other regions as State-owned enterprises crowd them out and the region clings to traditional industrial structures

By
NewsChina
Updated May.1

The role of private enterprises in driving China’s growth in the past and future has been repeatedly recognized and highlighted. Their concerns over the business environment have been prioritized in national policies. The annual Government Work Report published at the two sessions – the National People’s Congress and the Chinese People’s Political Consultative Conference held in March – pointed out that private, and small and micro enterprises are grappling with limited financial resources, while the business environment still falls short of the expectations of market players.

The problem is prominent in Northeast China. Once the country’s powerful industrial base during the planned economy period, it is now stagnating. Compared with Shanghai and provinces like Zhejiang and Guangdong, which boast a highly developed market economy and thriving private businesses, the northeastern region, comprised of Heilongjiang, Jilin and Liaoning provinces, faces more challenges in fostering its private enterprises. Among the top 500 private enterprises in 2017, 93 were based in Zhejiang, but only nine were in Northeast China, according to The China Top 500 Private list announced by the All-China Federation of Industry and Commerce.

After the central government pledged to encourage private enterprises in late 2018, local governments in the northeast, like other places across the country, pushed forward favorable policies to support private enterprises. The main focus has been on easing the financing difficulties that have hindered the growth of small- and medium-sized companies for a long time.

However, given that its deep-rooted historical problems need long-term efforts to get fixed, many analysts are skeptical the region can easily catch up with prosperous places in the Pearl River Delta and Yangtze River Delta areas, which have better business environments and have geared up efforts to support private businesses.

March to Money

The financing difficulties for small-and medium-sized enterprises (SMEs) is primarily caused by problems with the companies themselves and is worsened by wary financial institutions that refuse to provide innovative financing services to small companies, Jiang Youwei, mayor of Shenyang, Liaoning Province, told NewsChina. Some companies have low credit ratings and few assets they can leverage as collateral, Jiang said.

Liang Qidong, vice director of the Liaoning Academy of Social Sciences, agreed that the key to gaining access to financing lies in the credit worthiness of a company. But it is common for small companies to operate in violation of regulations. They lack financial transparency and credit records. Some companies do not even have a complete financial system, and some firms just want to take advantage of the loopholes in bank regulations to get money. Under these circumstances, these companies cannot meet even the lowest loan thresholds from lending institutions.

Governments in the three provinces have designed a series of policies to make bank loans more accessible for small companies. For example, banks in Liaoning, whose increase in their loan balance to private companies rises by over 30 percent or 50 percent a year could get rewarded with 0.25 percent or 0.5 percent of the newly increased loan amounts for private enterprises that year.

Jilin Province announced it would ensure loans to private enterprises to reach 50 percent of the newly added corporate lending in three years. Heilongjiang set similar fixed targets for its banks in terms of increasing loans to small companies.

According to Chen Yao, a research fellow at the Chinese Academy of Social Sciences, “setting goals” for banks will change the imbalance in bank lending to some extent, make banks pay more attention to SMEs and provide more services as well as help the government accumulate experience in supporting these companies. It will be effective to improve the financing environment for SMEs.

But Li Dongsheng, vice president of the All-China Federation of Industry and Commerce and CEO of TCL TV, told NewsChina he feared that easing companies’ financial burdens through setting goals for banks might put the latter in a dilemma: caught in the middle by the pressure of containing non-performing loans (NPL) and the pressure to support SMEs. It is a source of financial risks for banks.

On March 13, the China Banking and Insurance Regulatory Commission announced that commercial banks could increase the NPL ratio for small- and micro-companies by at most three percentage points higher than the NPL ratio for other kinds of loans. Previously, Heilongjiang Province also put forward policies to increase the NPL ratio for small- and micro-companies by two percentage points. It is regarded as one way out for banks.

Wang Yuxia, professor of economics at Dongbei University of Finance & Economics, believes that commercial banks should be distinguished from policy banks and thus should not shoulder too many political and social duties, such as increasing loans to small companies to stabilize employment. Commercial banks pursue profits, after all. If the NPL ratio is too high as a result of too many loans to SMEs, it might lead to chaos in the financial market. Wang suggested that policy banks take the responsibility, so if there are bad results, they will be backed up by

national finance.

What’s more, Wang told NewsChina that in 2019, the Chinese economy is under pressure from a slowdown, and externally the Sino-US trade woes expose the economy to more risks. Businesses will face more challenges than in 2018. This means if the government wants to continue to encourage banks to support SMEs, it should make more detailed regulations to guide banks on how to avoid and control risks, and there should be operable policies of supervision and management. “But as of now… the reform lacks support policies,” Wang said.

Li Dongsheng believes that it is more reasonable to help companies get money via market approaches instead of the administrative methods that already proved problematic. He suggested the government start building guarantee institutions to help companies with low credit ratings access loans, although they may carry higher interest rates.

The Liaoning provincial government is already restructuring its policy-based financing guarantee system to improve its services, particularly aiming to support the development of small- and medium-sized science and technology companies with more growth potential.

Direct Finance

Besides bank loans, the capital market is expected to play a bigger role in financing for private companies in the three provinces. For example, the Heilongjiang provincial government encourages State-owned enterprises (SOEs), private companies and listed companies to establish private-equity investment and venture capital investment institutions to attract capital. It also supports qualified private companies to obtain financing via issuing bonds, floating and refinancing on the capital market. For companies that list on different stock exchange markets, it provides rewards of at least two million yuan (US$297,898).

Liaoning Province is also encouraging all local governments to use their industrial

investment funds to support private companies to establish private-equity funds and issue corporate bonds. An exchange center has also been set up where shares in unlisted companies can be traded. In 2018, the number of new companies in the exchange center rose by 46 percent, making a total of 930 listed companies.

Jiang believes that if entrepreneurs have good ideas but lack finance, they could raise funds by offering shares to other investors to diversify their shareholding structure. In Shenyang, the municipal government has established a special team to help and encourage companies to list on capital markets.

Indirect financing through banks will bring more burdens to companies while direct financing, either through going public or issuing bonds, means less pressure in paying the debts, allowing companies to be more focused on their operation, Chen Yao said.

Chen Yulu, vice director of the People’s Bank of China (PBoC), the country’s central bank, pointed out in March 2018 that between 2013 and 2018, the amount of bonds issued rose by 45.7 percent on average annually, but there remains much room to develop the direct financing market, particularly the equity financing market. Statistics from the PBoC show that 77 percent of funds raised by Chinese enterprises were bank loans, while only 13 percent were bonds and two percent were from the stock market in 2018.

The problem is particularly prominent in Northeast China, where the capital market is underdeveloped and many entrepreneurs have weak awareness of financing. Liu Fei, mayor of Jilin city, Jilin Province told NewsChina that the majority of companies in the region rely on banks for loans, with a small number of listed companies. In 2017, among the 400-plus stocks listed on the A-share IPO market, those from Guangdong, Zhejiang and Jiangsu provinces accounted for 98, 87 and 65 while there were four from the northeastern region.

A job fair in Jilin city, Jilin Province, May 2014

Breaking Free

The new policies may have solved the urgent financial difficulties of some enterprises and improved the business environment in Northeast China, said Wang Yuxia. But she added that it is hard to fix the problems in the region with piecemeal measures.

Wang Yuxia believes it is costlier to do business in the region because it has been affected by the planned economy for a long time, particularly in terms of dealing with the government. And it takes long-term efforts to change the stereotyped image of the region in terms of the business environment.

Since the planned economy entered first and exited last, the northeast is still heavily marked by the features of a planned economy and imbalanced industrial structure. Many industries in the northeast are resource-based and rely on resource processing, with a limited number of science and technology innovation industries. As natural resources have dwindled, the enterprises lost momentum.

Liang Qidong noted that while many regions across China have entered Industry 3.0 (the automation of single machines and processes) and even 4.0 that features digital transformation and smart manufacturing, private enterprises in the northeast remain at the level of Industry 1.0 and 2.0, characterized by mass production and assembly lines. “The inheritance of the planned economy is mainly reflected in the dominance of large SOEs and the intervention from the government [in business],” Liang said.

SOEs, given their large scale, crowd out smaller businesses and dominate market share, so private enterprises are left fighting over the scraps, Chen Yao pointed out. He said that the more SOEs in a region, the more challenges its private enterprises will face. The market for private enterprises in the northeast is very small, most of which serve as suppliers for SOEs.

The economy of Northeast China is mainly dependent on several big SOEs, which makes the economic transformation there even harder. In this case, Liang believes that the key to developing the private economy in the region lies in SOE reform.

On the one hand, SOEs should gain success through market competition instead of via their monopoly position, Chen Yao pointed out. On the other, private enterprises should adapt to the market and make innovation capability the driving force behind their development.

An Guiwu, director of the department for development and reform in Jilin Province, told NewsChina that the rich resources in Northeast China resulted in a resource-based mindset popular among businesses, which actually stymied enterprises from developing their own abilities to innovate.

Bound by traditional ideas and easily satisfied, some enterprises in the northeast do not have the guts and ambition to do big business, which is regarded to have restrained the overall quality of private enterprises from getting to a higher level, several interviewed experts noted.

Under these circumstances, there is a long way to go before private enterprises in this region can break out of their old shackles.

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